WASHINGTON -- A special Congressional committee charged with forming a plan to reduce the U.S. deficit by $1.2 trillion has declared failure, with each side blaming the other for the lack of agreement.

A joint statement from committee co-chairs Senator Patty Murray (Democrat-Washington) and Representative Jeb Hensarling (Republican-Texas), said, "We are deeply disappointed that we have been unable to come to a bipartisan deficit reduction agreement."

By law, the failure to reach agreement on a deficit reduction plan triggers $1.2 trillion in automatic spending cuts across an array of domestic and military spending items.

President Barack Obama addressed reporters late this afternoon and blamed Republicans for being the main stumbling block to agreement, saying "too many Republicans" refused to compromise.

He also said he will veto any attempt by Congress to stop the automatic spending cuts, but noted that Congress still has time to find a solution before they take effect in 2013.

"The only way these spending cuts will not take place is if Congress gets back to work and agrees on a balanced plan to reduce the deficit by at least $1.2 trillion. That's exactly what they need to do, that's the job they promised to do. And they've still got a year to figure it out," Obama said.

'Cripple' The Military

Republicans are said to be especially concerned about deep cuts to the Pentagon's budget, which Defense Secretary Leon Panetta has warned could "cripple" the nation's military preparedness.

Among other things, the Pentagon would have to cancel construction projects, research work, and weapons programs.

The Joint Select Committee on Deficit Reduction, comprised of six Democrats and six Republicans, was given three months last August to agree on a program of spending cuts and revenue increases that would bring down America's $15 trillion debt over the next 10 years. The committee was created after a heated debate in Congress over whether to raise the country's debt ceiling brought the country to the brink of default and led to a credit downgrade by at least one ratings agency.

Democrats on the special committee wanted to use a combination of spending cuts and tax increases to achieve the reduction, while Republicans insisted that only spending cuts be used.

At the heart of the stand-off were tax cuts for wealthy Americans -- those making more than $1 million a year -- which were signed into law in 2007 by former President George W. Bush. The so-called "Bush tax cuts" are set to expire in 2012 and Republicans have refused to agree to any deficit-reduction deal that doesn't include an extension of that deadline.

'Missed Opportunity'

Committee co-chair Hensarling told Fox News on November 20 that his party hadn't seen "any Democratic offer that did not include several million in tax increases."

He said Democrats also resisted cuts to health care programs for the poor and elderly, which are the main drivers of government debt.

"It's a huge missed opportunity. The nation is facing a debt crisis, it's facing a jobs crisis, and the two are interrelated. And we all know - even the president will admit-that the great drivers of our debt are Medicare, Medicaid, and health care, nothing else comes close, and he's right. And I give him an 'A' for courage for saying that," said Hensarling. "But unfortunately, what we haven't seen in these talks from the other side, is any Democrat willing to put a proposal on the table that actually solves the problem."

His co-chair Murray said on CNN's State of the Union political talk show that Republicans are protecting the affluent at the expense of other citizens.

"There is one sticking divide, and that is the issue of what I call 'shared sacrifice' -- where everybody contributes in a very challenging time for our country -- and that's the Bush tax cuts, and making sure that any kind of package includes everybody coming to the table, and the wealthiest Americans, those who earn over $1 million every year, have to share too," she said. "And that line in the sand we haven't seen any Republicans willing to cross yet."

The failure of the deficit reduction committee to reach agreement is the latest casualty of the deep partisan political divide that has split apart members of Congress over the past year.

With the 2012 election less than a year away, the two parties have failed to reach agreement on a wide range of issues, from the environment to economic stimulus.

As a result, public faith in Washington has plummeted; approval ratings for Congress have dropped to an unprecedented low.

But this impasse in particular stands to have greater consequence for the country than others because, according to law, if the committee fails to come up with a plan to reduce the deficit by $1.2 trillion, the same amount will be automatically cut from domestic and military spending.

Many social programs, including benefits for military veterans and pensioners, would be exempt from the automatic cuts.

News of the committee's failure shook investors' confidence and today U.S. financial markets reflected their concern over out-of-control government debt on both sides of the Atlantic.

The Dow Jones industrial average dropped 248 points, or 2.11 percent, to end at 11,547. The Standard & Poor's 500 Index lost 22.67 points, or 1.86 percent, to finish at 1,192.98. The Nasdaq Composite Index dropped 49.36 points, or 1.92 percent, to close at 2,523.14.

Wall Street had hit their lowest point this month, with the Standards and Poor 500 index down 2.3 percent as it dropped below the 1,200-point level for the first time since October.

It was the same story in Europe, where stocks hit 6-week lows as Moody's credit agency warned about France's rating outlook and EU leaders continued to debate how to deal with the massive public debt in some eurozone countries.